Magna announces third quarter and year to date results
AURORA, ON, Nov. 7, 2006 -- Magna International Inc. (TSX: MG.A, MG.B; NYSE: MGA) today reported financial results for the third quarter and nine months ended September 30, 2006.
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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2006 2005 2006 2005
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Sales $ 5,424 $ 5,381 $ 17,812 $ 16,957
Operating income $ 155 $ 240 $ 750 $ 817
Net income $ 94 $ 159 $ 499 $ 556
Diluted earnings per share $ 0.86 $ 1.44 $ 4.52 $ 5.16
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All results are reported in millions of U.S. dollars,
except per share figures.
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THREE MONTHS ENDED SEPTEMBER 30, 2006
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We posted sales of $5.4 billion for the third quarter ended September 30, 2006, an increase of 1% over the third quarter of 2005. This higher sales level was achieved as a result of increases in our European production and complete vehicle assembly sales offset in part by reductions in North American production sales and tooling, engineering and other sales.
During the third quarter of 2006, North American and European average dollar content per vehicle increased 1% and 18% respectively, each over the comparable quarter in 2005. During the third quarter of 2006, North American and European vehicle production declined 7% and 5% respectively, each in comparison to the third quarter of 2005.
Complete vehicle assembly sales increased 16% to $1.017 billion for the third quarter of 2006 compared to $879 million for the third quarter of 2005 and complete vehicle assembly volumes were unchanged from the third quarter of 2006 compared to the third quarter of 2005.
Our operating income was $155 million for the third quarter ended September 30, 2006 compared to $240 million for the third quarter ended September 30, 2005, and we earned net income for the third quarter of 2006 of $94 million compared to $159 million for the third quarter of 2005.
Diluted earnings per share were $0.86 for the third quarter ended September 30, 2006 compared to $1.44 for the third quarter ended September 30, 2005.
During the third quarter ended September 30, 2006, we generated cash from operations before changes in non-cash operating assets and liabilities of $273 million, and generated $49 million from non-cash operating assets and liabilities. Total investment activities for the third quarter of 2006 were $255 million, including $198 million in fixed asset additions, $51 million to purchase subsidiaries, and a $6 million increase in investments and other assets.
NINE MONTHS ENDED SEPTEMBER 30, 2006 ------------------------------------
We posted sales of $17.8 billion for the nine months ended September 30, 2006, an increase of 5% over the nine months ended September 30, 2005. This higher sales level was achieved as a result of increases in our North American and European production sales and complete vehicle assembly sales offset in part by reductions in tooling, engineering and other sales.
During the nine months ended September 30, 2006, North American and European average dollar content per vehicle increased 6% and 11% respectively, each over the comparable nine-month period in 2005. During the nine months ended September 30, 2006, North American and European vehicle production declined 1% and 3%, respectively, each in comparison to the nine months ended September 30, 2005.
Complete vehicle assembly sales increased 2% to $3.132 billion for the nine months ended September 30, 2006 compared to $3.059 billion for the nine months ended September 30, 2005 and complete vehicle assembly volumes increased 11% for the first nine months of 2006 compared to the first nine months of 2005.
Our operating income was $750 million for the nine months ended September 30, 2006 compared to $817 million for the nine months ended September 30, 2005, and we earned net income of $499 million for the first nine months of 2006 compared to $556 million for the first nine months of 2005.
Diluted earnings per share were $4.52 for the nine months ended September 30, 2006 compared to $5.16 for the nine months ended September 30, 2005.
During the nine months ended September 30, 2006, we generated cash from operations before changes in non-cash operating assets and liabilities of $1.1 billion, and invested $317 million in non-cash operating assets and liabilities. Total investment activities for the first nine months of 2006 were $856 million, including $544 million in fixed asset additions, $254 million to purchase subsidiaries, and a $58 million increase in investments and other assets.
A more detailed discussion of our consolidated financial results for the third quarter and nine months ended September 30, 2006 is contained in the Management's Discussion and Analysis of Results of Operations and Financial Position and the unaudited interim consolidated financial statements and notes thereto, which are attached to this Press Release.
OTHER MATTERS -------------
Our Board of Directors today declared a quarterly dividend with respect to our outstanding Class A Subordinate Voting Shares and Class B Shares for the quarter ended September 30, 2006. The dividend of U.S. $0.38 per share is payable on December 15, 2006 to shareholders of record on November 30, 2006.
We are the most diversified automotive supplier in the world. We design, develop and manufacture automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles, primarily for sale to original equipment manufacturers of cars and light trucks in North America, Europe, Asia and South America. Our capabilities include the design, engineering, testing and manufacture of automotive interior systems; seating systems; closure systems; metal body systems; vision and engineered glass systems; electronic systems; plastic body, lighting and exterior trim systems; various powertrain and drivetrain systems; retractable hard top and soft top roof systems; as well as complete vehicle engineering and assembly.
We have approximately 83,000 employees in 228 manufacturing operations and 62 product development and engineering centres in 23 countries.
------------------------------------------------------------------------- We will hold a conference call for interested analysts and shareholders to discuss our third quarter results on Tuesday, November 7, 2006 at 8:30 a.m. EST. The conference call will be co-chaired by Mark T. Hogan, President and Vincent J. Galifi, Executive Vice-President and Chief Financial Officer. The number to use for this call is 1-800-741-7590. The number for overseas callers is 1-416-641-6210. Please call in 10 minutes prior to the call. We will also webcast the conference call at www.magna.com. The slide presentation accompanying the conference call will be available on our website Tuesday morning prior to the call. For further information, please contact Louis Tonelli, Vice-President, Investor Relations at 905-726-7035. For teleconferencing questions, please call Karin Kaminski at 905-726-7103. ------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS --------------------------
The previous discussion may contain statements that, to the extent that they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of applicable securities legislation. Forward-looking statements may include financial and other projections, as well as statements regarding our future plans, objectives or economic performance, or the assumptions underlying any of the foregoing. We use words such as "may", "would", "could", "will", "likely", "expect", "anticipate", "believe", "intend", "plan", "forecast", "project", "estimate" and similar expressions to identify forward-looking statements. Any such forward-looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. However, whether actual results and developments will conform with our expectations and predictions is subject to a number of risks, assumptions and uncertainties. These risks, assumptions and uncertainties include, but are not limited to, the impact of: declining production volumes and changes in consumer demand for vehicles; a reduction in the production volumes of certain vehicles, such as certain light trucks; our ability to offset increases in the cost of commodities, such as steel and resins, as well as energy prices; fluctuations in relative currency values; our ability to offset price concessions demanded by our customers; our ability to compete with suppliers with operations in low cost countries; changes in our mix of earnings between jurisdictions with lower tax rates and those with higher tax rates, as well as our ability to fully benefit tax losses; other potential tax exposures; the financial distress of some of our suppliers and customers; the inability of our customers to meet their financial obligations to us; our ability to fully recover pre-production expenses; warranty and recall costs; the termination by our customers of any material contracts; product liability claims in excess of our insurance coverage; expenses related to the restructuring and rationalization of some of our operations; impairment charges; legal claims against us; risks of conducting business in foreign countries; unionization activities at our facilities; work stoppages and labour relations disputes; changes in laws and governmental regulations; costs associated with compliance with environmental laws and regulations; potential conflicts of interest involving our controlling shareholder, the Stronach Trust; and other factors set out in our Annual Information Form filed with securities commissions in Canada and our annual report on Form 40-F filed with the United States Securities and Exchange Commission, and subsequent filings. In evaluating forward-looking statements, readers should specifically consider the various factors which could cause actual events or results to differ materially from those indicated by such forward-looking statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements to reflect subsequent information, events, results or circumstances or otherwise.
------------------------------------------------------------------------- For further information about Magna, please see our website at www.magna.com. Copies of financial data and other publicly filed documents are available through the internet on the Canadian Securities Administrators' System for Electronic Document Analysis and Retrieval (SEDAR) which can be accessed at www.sedar.com and on the United States Securities and Exchange Commission's Electronic Data Gathering, Analysis and Retrieval System (EDGAR) which can be accessed at www.sec.gov. ------------------------------------------------------------------------- MAGNA INTERNATIONAL INC. Management's Discussion and Analysis of Results of Operations and Financial Position ------------------------------------------------------------------
All amounts in this Management's Discussion and Analysis of Results of Operations and Financial Position ("MD&A") are in U.S. dollars and all tabular amounts are in millions of U.S. dollars, except per share figures and average dollar content per vehicle, which are in U.S. dollars, unless otherwise noted. When we use the terms "we", "us", "our" or "Magna", we are referring to Magna International Inc. and its subsidiaries and jointly controlled entities, unless the context otherwise requires.
This MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the three months and nine months ended September 30, 2006 included in this Press Release, and the audited consolidated financial statements and MD&A for the year ended December 31, 2005 included in our 2005 Annual Report to Shareholders. The unaudited interim consolidated financial statements for the three months and nine months ended September 30, 2006 and the audited consolidated financial statements for the year ended December 31, 2005 are both prepared in accordance with Canadian generally accepted accounting principles.
This MD&A has been prepared as at November 6, 2006. OVERVIEW -------------------------------------------------------------------------
We are a leading global supplier of technologically advanced automotive systems, assemblies, modules and components. We follow a corporate policy of functional and operational decentralization. We conduct our operations through divisions, each of which is an autonomous business unit operating within pre-determined guidelines. As at September 30, 2006, we had 228 manufacturing divisions and 62 product development and engineering centres in 23 countries. We design, develop and manufacture automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles, for sale to original equipment manufacturers ("OEMs") of cars and light trucks in North America, Europe, Asia and South America. Our product capabilities span a number of major automotive areas including: interiors; seating; closures; metal body systems; vision and engineered glass systems; electronics; plastic body, lighting and exterior trim systems; various powertrain and drivetrain systems; retractable hard top and soft top roof systems; and complete vehicle engineering and assembly.
During 2005, we completed the privatizations of our former public subsidiaries: Tesma International Inc.; Decoma International Inc. ("Decoma"); and Intier Automotive Inc. (the "Privatizations"). The Privatizations have allowed us to improve our strategic positioning, particularly with respect to the development of vehicle modules that cross our traditional product lines, and to better exploit our various competencies, particularly our complete vehicle expertise.
Our operations are segmented on a geographic basis between North America, Europe, and Rest of World (primarily Asia and South America). A co-Chief Executive Officer heads management in each of our two primary markets, North America and Europe. The role of the North American and European management teams is to manage our interests to ensure a coordinated effort across our different product capabilities. In addition to maintaining key customer, supplier and government contacts in their respective markets, our regional management teams centrally manage key aspects of our operations while permitting our divisions enough flexibility through our decentralized structure to foster an entrepreneurial environment.
Our success is primarily dependent upon the levels of North American and European car and light truck production by our customers and the relative amount of content we have on the various programs. OEM production volumes in different regions may be impacted by factors which may vary from one region to the next, including general economic and political conditions, interest rates, energy and fuel prices, international conflicts, labour relations issues, regulatory requirements, trade agreements, infrastructure, legislative changes, environmental emission and safety issues. A number of other factors, discussed below under "Industry Trends and Risks" also affect our success, including such things as relative currency values, commodities prices, price reduction pressures from our customers, the financial condition of our supply base and competition from manufacturers with operations in low cost countries.
HIGHLIGHTS -------------------------------------------------------------------------
We reported sales of $5.4 billion for the third quarter of 2006, an increase of 1% over the third quarter of 2005. This higher sales level was achieved as a result of increases in our European production and complete vehicle assembly sales offset in part by reductions in North American production sales and tooling, engineering and other sales.
In the third quarter of 2006, our largest OEM customers in North America significantly reduced vehicle production levels, particularly on their light truck programs. While overall North American vehicle production volumes declined 7% in the third quarter of 2006 compared to the third quarter of 2005, General Motors ("GM"), Ford and Chrysler light truck production declined 8%, 24% and 26%, respectively.
The production declines reflect a number of factors that continue to impact our largest customers in North America, including declining market share, high inventory levels on certain vehicle programs, and a shift in consumer preferences away from light trucks. The lower production levels at our largest OEM customers, particularly for certain light trucks, in the third quarter of 2006, significantly impacted our sales and earnings, as our content on a number of these programs is higher than our consolidated average content.
Operating income for the third quarter of 2006 decreased 35% to $155 million from $240 million for the third quarter of 2005. Excluding the unusual items recorded in the third quarters of 2006 and 2005 (see "Unusual Items" below), operating income for the third quarter of 2006 decreased $68 million or 30%. The decrease in operating income excluding unusual items was primarily due to lower sales in North America, operational inefficiencies and other costs at certain facilities, particularly at certain interior systems facilities, and incremental customer price concessions. These factors were partially offset by a favourable revaluation of warranty accruals, additional margins earned on the launch of new programs during or subsequent to the third quarter of 2005, increased margins earned on higher volumes for certain assembly programs and the closure, subsequent to the third quarter of 2005, of certain underperforming divisions which incurred losses during the third quarter of 2005.
Net income for the third quarter of 2006 decreased 41% or $65 million to $94 million from $159 million for the third quarter of 2005. Excluding the unusual items recorded in the third quarters of 2006 and 2005 (see "Unusual Items" below), net income for the third quarter of 2006 decreased 36% or $56 million. The decrease in net income excluding unusual items was primarily a result of the decrease in operating income (excluding unusual items) partially offset by lower income taxes. Income taxes were lower despite the negative impact of an unfavourable tax decision (see "Incomes Taxes" below).
Diluted earnings per share for the third quarter of 2006 decreased 40% or $0.58 to $0.86 from $1.44 for the third quarter of 2005. Excluding the unusual items recorded in the third quarters of 2006 and 2005 (see "Unusual Items" below), diluted earnings per share decreased 36% or $0.50 primarily as a result of the decrease in net income (excluding unusual items).
Unusual Items
During the three months and nine months ended September 30, 2006 and 2005, we recorded certain unusual items as follows:
2006 2005
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Diluted Diluted
Earn- Earn-
Operat- ings Operat- ings
ing Net per ing Net per
Income Income Share Income Income Share
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Third Quarter
Restructuring
charges(1) $ (5) $ (4) $ (0.04) $ (14) $ (11) $ (0.10)
Settlement gain(2) - - - 26 16 0.14
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Total third quarter
unusual items (5) (4) (0.04) 12 5 0.04
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Second Quarter
Restructuring
charges(1) $ (25) $ (18) $ (0.16) $ (9) $ (7) $ (0.07)
Impairment
charges(1) - - - (5) (5) (0.05)
Sale of
facilities(3) (17) (15) (0.14) 16 10 0.09
Foreign currency
gain(4) - - - 18 18 0.16
Future tax
recovery(4) - 10 0.09 - - -
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Total second quarter
unusual items (42) (23) (0.21) 20 16 0.13
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First Quarter
Restructuring
charges(1) (10) (9) (0.08) (5) (4) (0.04)
Charges associated
with MG Rover(5) - - - (15) (13) (0.13)
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Total first quarter
unusual items (10) (9) (0.08) (20) (17) (0.17)
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Total year to date
unusual items $ (57) $ (36) $ (0.33) $ 12 $ 4 $ 0.03
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(1) Restructuring and Impairment Charges
(a) For the nine months ended September 30, 2006
During the first quarter of 2006, we incurred restructuring and
rationalization charges of $10 million related to activities
that were initiated in 2005. Specifically, in January 2006, we
reached an agreement with the workers' council at a facility in
Belgium that covers non-contractual termination benefits for
employees at this facility. As a result, we recorded the
$8 million cost of this agreement in the first quarter of 2006.
During the second quarter of 2006, we incurred restructuring
and rationalization charges of $25 million. Specifically, in
June, we recorded a $17 million charge as a result of an
agreement we reached with employees related to rightsizing a
facility in the United States. In addition, we incurred
additional restructuring and rationalization charges of
$4 million related to two facilities in North America and
$4 million related to two facilities in Europe.
During the third quarter of 2006, we incurred restructuring and
rationalization charges of $4 million related to three
facilities in North America and $1 million related to one
facility in Europe.
(b) For the nine months ended September 30, 2005
During the first quarter of 2005 we incurred rationalization
charges of $4 million related to a facility in North America
and we also expensed previously capitalized bank facility fees
as a result of the cancellation of Decoma's term credit
facility.
During the second quarter of 2005, we incurred restructuring
and impairment charges totalling $14 million related
substantially to three European facilities.
During the third quarter of 2005, we incurred restructuring and
impairment charges totalling $14 million substantially related
to a European facility and the Privatizations.
(2) Settlement Gain
During the third quarter of 2005, we recorded a settlement gain with
respect to the receipt of $26 million awarded by a court in a lawsuit
commenced by us in 1998 in respect of defective materials installed
by a supplier in a real estate project.
(3) Sale of Facilities
During the second quarter of 2006, we entered into agreements for the
sale of two underperforming powertrain facilities. As a result, we
incurred losses on disposition of the facilities of $12 million and
$5 million in Europe and North America, respectively. During the
second quarter of 2005, we recorded a $16 million gain on sale of a
non-core seat component facility in North America.
(4) Other Unusual Items
During the second quarter of 2006 we recorded a $10 million future
income tax recovery as a result of a reduction in future income tax
rates in Canada. During the second quarter of 2005, we recorded an
$18 million foreign currency gain on the repatriation of funds from
Europe.
(5) MG Rover
In April 2005, MG Rover Group Limited ("MG Rover") was placed into
administration, which is similar to Chapter 11 bankruptcy protection
in the United States (the "MG Rover situation"). As a result, we
recorded charges of $15 million related to our MG Rover assets and
supplier obligations during the first quarter of 2005.
INDUSTRY TRENDS AND RISKS
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A number of trends have had a significant impact on the global automotive industry in recent years, including:
- the growth of Asian-based OEMs in North America and Europe and
declining market share at certain of our customers in our traditional
markets;
- increased pressure by OEMs on automotive suppliers to reduce their
prices, including through retroactive price reductions, and bear
additional costs;
- increases in raw materials and commodity prices, such as steel and
resin, as well as energy prices;
- the deterioration of the financial condition of the automotive supply
base and certain OEMs;
- the growth of the automotive industry in China, Korea, India and other
Asian countries, as well as parts of eastern Europe, and the migration
of manufacturing to such lower cost countries;
- increased engineering capabilities required in order to be awarded new
business for more complex systems and modules;
- increased outsourcing of larger modules;
- increased prevalence of vehicles built off high-volume global vehicle
platforms; and
- increased customer and consumer demand for lighter vehicles,
additional safety features, improved comfort, convenience and space
optimization features, alternative fuel systems and advanced
electronics systems.
The following are some of the more significant risks that could affect our ability to achieve our desired results:
- The global automotive industry is cyclical and consumer demand for
automobiles is sensitive to changes in certain economic and political
conditions, including interest rates, energy prices and international
conflicts (including acts of terrorism). Automotive sales and
production can also be affected by other factors, including labour
relations issues, regulatory requirements and trade agreements. In
North America, the industry is characterized by significant
overcapacity, fierce competition and significant pension and other
post employment benefit costs for the domestic automobile
manufacturers. In Europe, the market structure is relatively
fragmented with significant overcapacity. As a result of these
conditions, some of our customers are currently experiencing or may in
the future experience reduced consumer demand for their vehicles,
leading to declining vehicle production volumes. A reduction in
vehicle production volumes by any of our significant customers could
have a material adverse effect on our profitability.
- Rising healthcare, pension and other post-employment benefit costs are
having a significant adverse effect on the profitability and
competitiveness of a number of North American and European OEMs and
automotive component suppliers. Increased raw materials prices,
including steel and resins, and energy prices are also adversely
affecting OEMs and automotive component suppliers. Other economic
conditions, such as increased gas prices, have affected and could
further threaten sales of certain models, such as full-size sport
utility vehicles and light trucks. All of these conditions, coupled
with a continued decline in market share, could further threaten the
financial condition of some of our customers, putting additional
pressure on us to reduce our prices and exposing us to greater credit
risk. In the event that our customers are unable to satisfy their
financial obligations or seek protection from their creditors, we may
incur additional expenses as a result of such credit exposure, which
could have a material adverse effect on our profitability and
financial condition.
- Although we supply parts to all of the leading OEMs, a significant
majority of our sales are to four such customers, two of which are
rated as below investment grade by credit rating agencies. We are
attempting to further diversify our customer base, particularly to
increase our business with Asian based OEMs. A decline in overall
production volumes by any of our four largest customers could have an
adverse effect on our profitability, particularly if we are unable to
further diversify our customer base. Moreover, while we supply parts
for a wide variety of vehicles produced in North America and Europe,
we do not supply parts for all vehicles produced, nor is the number or
value of parts evenly distributed among the vehicles for which we do
supply parts. Shifts in market share among vehicles (including shifts
away from vehicles we assemble) or the early termination, loss,
renegotiation of the terms of, or delay in, the implementation of any
significant production or assembly contract could have an adverse
effect on our profitability.
- The competitive environment in the automotive industry has been
intensifying as our customers seek to take advantage of lower
operating costs in China, other countries in Asia and parts of Eastern
Europe. As a result, we are facing increased competition from
suppliers that have manufacturing operations in low cost countries.
While we continue to expand our manufacturing footprint with a view to
taking advantage of manufacturing opportunities in low cost countries,
we cannot guarantee that we will be able to fully realize such
opportunities. Additionally, the establishment of manufacturing
operations in emerging market countries carries its own risks,
including those relating to political and economic instability; trade,
customs and tax risks; currency exchange rates; currency controls;
insufficient infrastructure; and other risks associated with
conducting business internationally. The loss of any significant
production contract to a competitor in low cost countries or
significant costs and risks incurred to enter and carry on business in
these countries could have an adverse effect on our profitability.
- Prices for key commodities used in our parts production, particularly
steel and resin, remain at elevated levels with the possibility of
future increases in some commodities. We expect steel prices will
remain at elevated levels in 2006 compared to levels earlier this
decade. Approximately half of our steel is acquired through resale
programs operated by the automobile manufacturers, which do not expose
us to steel price increases, and the balance is acquired through spot,
short-term and long-term contracts. However, a steel supplier has
challenged its long-term agreements with us for certain steel products
while steel prices were rising and, to the extent that it successfully
disputes, terminates or otherwise refuses to honour its contracts, our
exposure to steel price increases will increase to the extent that
steel prices remain at elevated levels. We also sell scrap steel,
which is generated through our parts production process, and the
revenues from these sales have reduced some of our exposure to steel
price increases in the past. However, if scrap steel prices decline,
while steel prices remain high, our ability to reduce our exposure to
steel price increases will diminish. To the extent we are unable to
fully mitigate our exposure to increased commodity prices through
hedging strategies, by engineering products with reduced steel, resin
or other commodity content, or by passing additional steel and resin
costs to our customers, such additional commodity costs could have a
material adverse effect on our profitability.
- We rely on a number of suppliers to supply us with a wide range of
components required in connection with our business. Economic
conditions, intense pricing pressures, increased commodity prices and
a number of other factors have left many automotive suppliers in
varying degrees of financial distress. The continued financial
distress or the insolvency or bankruptcy of one of our major suppliers
could disrupt the supply of components to us from these suppliers,
possibly resulting in a temporary disruption in the supply of products
by us to our customers. Additionally, the financial distress or the
insolvency or bankruptcy of a significant supplier to one of our
customers could disrupt the supply of products to such customer,
resulting in a reduction in production by our customer. Such a
reduction in our customer's production could negatively impact our
production, resulting in unrecoverable losses. Any prolonged
disruption in the supply of critical components by our suppliers or
suppliers to one of our customers, the inability to re-source
production of a critical component from a financially distressed
automotive components sub-supplier, or any temporary shut-down of one
of our production lines or the production lines of our customers,
could have a material adverse effect on our profitability.
Additionally, the insolvency, bankruptcy or financial restructuring of
any of our critical suppliers could result in us incurring
unrecoverable costs related to the financial work-out of such
suppliers and/or increased exposure for product liability, warranty or
recall costs relating to the components supplied by such suppliers to
the extent such suppliers are not able to assume responsibility for
such amounts, which could have an adverse effect on our profitability.
- We have entered into, and will continue to enter into, long-term
supply arrangements with our customers which provide for, among other
things, price concessions over a pre-defined supply term. To date,
these concessions have been fully or partially offset by cost
reductions arising principally from product and process improvements
and price reductions from our suppliers. However, the competitive
automotive industry environment in North America, Europe and Asia has
caused these pricing pressures to intensify. Some of our customers
have demanded, and in light of challenging automotive industry
conditions may continue to demand, additional price concessions and/or
retroactive price reductions. We may not be successful in offsetting
all of these price concessions or reductions through improved
operating efficiencies, reduced expenditures or reduced prices from
our suppliers. To the extent that we are not able to offset price
concessions through cost reductions or improved operating
efficiencies, such concessions could have a material adverse effect on
our profitability.
- Although our financial results are reported in U.S. dollars, a
significant portion of our sales and operating costs are realized in
Canadian dollars, euros, British pounds and other currencies. Our
profitability is affected by movements of the U.S. dollar against the
Canadian dollar, the euro, the British pound and other currencies in
which we generate revenues and incur expenses. However, as a result of
hedging programs employed by us, primarily in Canada, foreign currency
transactions are not fully impacted by the recent movements in
exchange rates. We record foreign currency transactions at the hedged
rate where applicable. Despite these measures, significant long-term
fluctuations in relative currency values, in particular a significant
change in the relative values of the U.S. dollar, Canadian dollar,
euro or British pound, could have an adverse effect on our
profitability and financial condition.
- We continue to be pressured to absorb costs related to product design,
engineering and tooling, as well as other items previously paid for
directly by OEMs. In particular, some OEMs have requested that we pay
for design, engineering and tooling costs that are incurred up to the
start of production and recover these costs through amortization in
the piece price of the applicable component. Some of these costs
cannot be capitalized, which could have an adverse effect on our
profitability until the programs in respect of which they have been
incurred are launched. In addition, since our contracts generally do
not include any guaranteed minimum purchase requirements, if estimated
production volumes are not achieved, these costs may not be fully
recovered, which could have an adverse effect on our profitability.
- Our customers continue to demand that we bear the cost of the repair
and replacement of defective products which are either covered under
their warranty or are the subject of a recall by them. If our products
are, or are alleged to be, defective, we may be required to
participate in a recall of those products, particularly if the actual
or alleged defect relates to vehicle safety. Warranty provisions are
established based on our best estimate of the amounts necessary to
settle existing or probable claims on product defect issues. Recall
costs are costs incurred when government regulators and/or our
customers decide to recall a product due to a known or suspected
performance issue, and we are required to participate either
voluntarily or involuntarily. Costs typically include the cost of the
product being replaced, the customer's cost of the recall and labour
to remove and replace the defective part. We continue to experience
increased customer pressure to assume greater warranty responsibility.
Currently, under most customer agreements, we only account for
existing or probable claims. Under certain complete vehicle
engineering and assembly contracts, we record an estimate of future
warranty-related costs based on the terms of the specific customer
agreements, and the specific customer's warranty experience. The
obligation to repair or replace such products could have a material
adverse effect on our profitability and financial condition if the
actual costs are materially different from such estimates.
- Contracts from our customers consist of blanket purchase orders which
generally provide for the supply of a customer's annual requirements
for a particular vehicle, instead of a specified quantity of products.
These blanket purchase orders can be terminated by a customer at any
time and, if terminated, could result in us incurring various pre-
production, engineering and other costs which we may not recover from
our customer and which could have an adverse effect on our
profitability.
- We are also subject to the risk of exposure to product liability
claims in the event that the failure of our products results in bodily
injury and/or property damage. Currently, we have bodily injury
coverage under insurance policies. This coverage will continue until
August 2007 and is subject to renewal on an annual basis. A successful
claim against us in excess of our available insurance coverage could
have an adverse effect on our profitability and financial condition.
- In response to the increasingly competitive automotive industry
conditions, it is likely that we may further rationalize some of our
production facilities. In the course of such rationalization, we will
incur further costs related to plant closings, relocations and
employee severance costs. Such costs could have an adverse effect on
our short-term profitability. In addition, we are working to turn
around financially underperforming divisions, however, there is no
guarantee that we will be successful in doing so with respect to some
or all such divisions.
- We recorded significant impairment charges in 2005 and may do so in
2006 and in the future. Goodwill must be tested for impairment
annually, or more frequently when an event occurs that more likely
than not reduces the fair value of a reporting unit below its carrying
value. We also evaluate fixed assets and other long-lived assets for
impairment whenever indicators of impairment exist. The bankruptcy of
a significant customer or the early termination, loss, renegotiation
of the terms of, or delay in the implementation of any significant
production contract could be indicators of impairment. In addition, to
the extent that forward-looking assumptions regarding the impact of
improvement plans on current operations, in-sourcing and other new
business opportunities, program price and cost assumptions on current
and future business, the timing of new program launches and future
forecasted production volumes are not met, any resulting impairment
loss could have a material adverse effect on our profitability.
- From time to time, we may be contingently liable for contractual and
other claims with customers, suppliers and former employees. On an
ongoing basis, we attempt to assess the likelihood of any adverse
judgements or outcomes to these claims, although it is difficult to
predict final outcomes with any degree of certainty. At this time, we
do not believe that any of the claims which we are party to will have
a material adverse effect on our financial position, however, we
cannot provide any assurance to this effect.
RESULTS OF OPERATIONS
-------------------------------------------------------------------------
Average Foreign Exchange
For the three months For the nine months
ended September 30, ended September 30,
--------------------- -------------------
2006 2005 Change 2006 2005 Change
-------------------------------------------------------------------------
1 Canadian dollar equals
U.S. dollars 0.893 0.834 + 7% 0.884 0.818 + 8%
1 euro equals U.S. dollars 1.275 1.221 + 4% 1.246 1.262 - 1%
1 British pound equals
U.S. dollars 1.877 1.788 + 5% 1.820 1.843 - 1%
-------------------------------------------------------------------------
The preceding table reflects the average foreign exchange rates between the most common currencies in which we conduct business and our U.S. dollar reporting currency. The significant changes in these foreign exchange rates for the three months and nine months ended September 30, 2006 impacted the reported U.S. dollar amounts of our sales, expenses and income.
The results of operations whose functional currency is not the U.S. dollar are translated into U.S. dollars using the average exchange rates in the table above for the relevant period. Throughout this MD&A, reference is made to the impact of translation of foreign operations on reported U.S. dollar amounts where relevant.
Our results can also be affected by the impact of movements in exchange rates on foreign currency transactions (such as raw material purchases or sales denominated in foreign currencies). However, as a result of hedging programs employed by us, primarily in Canada, foreign currency transactions in the current period have not been fully impacted by the recent movements in exchange rates. We record foreign currency transactions at the hedged rate where applicable.
Finally, holding gains and losses on foreign currency denominated monetary items, which are recorded in selling, general and administrative expenses, impact reported results.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
-------------------------------------------------------------------------
Sales
For the three months
ended September 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
Vehicle Production Volumes
(millions of units)
North America 3.452 3.722 - 7%
Europe 3.336 3.509 - 5%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 756 $ 746 + 1%
Europe $ 394 $ 335 + 18%
-------------------------------------------------------------------------
Sales
External Production
North America $ 2,610 $ 2,777 - 6%
Europe 1,315 1,176 + 12%
Rest of World 68 47 + 45%
Complete Vehicle Assembly 1,017 879 + 16%
Tooling, Engineering and Other 414 502 - 18%
-------------------------------------------------------------------------
Total Sales $ 5,424 $ 5,381 + 1%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total sales increased 1% or $43 million to $5.42 billion for the third quarter of 2006 compared to $5.38 billion for the third quarter of 2005.
External Production Sales - North America
External production sales in North America decreased 6% or $167 million to $2.6 billion for the third quarter of 2006 compared to $2.8 billion for the third quarter of 2005. This decrease in production sales reflects a 7% decrease in North American vehicle production volumes partially offset by a 1% increase in our North American average dollar content per vehicle.
Our average dollar content per vehicle grew by 1% or $10 to $756 for the third quarter of 2006 compared to $746 for the third quarter of 2005, primarily as a result of:
- the launch of new programs during or subsequent to the third quarter
of 2005, including:
- GM's new full-size SUVs;
- the Ford Fusion, Mercury Milan and Lincoln Zephyr;
- the Dodge Caliber; and
- the Mercedes GL Class;
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar;
- increased production and/or content on certain programs, including:
- the Chevrolet HHR;
- the Chevrolet Impala; and
- the Pontiac G6; and
- the acquisition of CTS in February 2006.
These factors were largely offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Dodge Caravan, Grand Caravan and Chrysler Town & Country;
- the Ford F-Series SuperDuty;
- the Hummer H3;
- the Ford Escape and Mazda Tribute;
- the Chrysler Pacifica;
- the Ford Freestar and Mercury Monterey;
- the Dodge Durango; and
- the Chevrolet Envoy, Buick Rainier and GMC Trailblazer;
- programs that ended production during or subsequent to the third
quarter of 2005;
- incremental customer price concessions; and
- the sale of certain underperforming divisions during 2006.
External Production Sales - Europe
External production sales in Europe increased 12% or $139 million to $1.3 billion for the third quarter of 2006 compared to $1.2 billion for the third quarter of 2005. This increase in production sales reflects an 18% increase in our European average dollar content per vehicle partially offset by a 5% decline in European vehicle production volumes.
Our average dollar content per vehicle grew by 18% or $59 to $394 for the third quarter of 2006 compared to $335 for the third quarter of 2005, primarily as a result of:
- acquisitions during or subsequent to the third quarter of 2005,
including the acquisition of CTS in February 2006;
- an increase in reported U.S. dollar sales as a result of the
strengthening of the euro and British pound, each against the
U.S. dollar;
- increased production and/or content on certain programs, including:
- the BMW X3;
- the Mercedes B-Class; and
- the Volkswagen Transporter and Multivan; and
- the launch of new programs during or subsequent to the third quarter
of 2005, including:
- the Honda Civic; and
- the Peugeot 207.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including the Mercedes A-Class and C-Class; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in the Rest of World increased 45% or $21 million to $68 million for the third quarter of 2006 compared to $47 million for the third quarter of 2005. The increase in production sales is primarily a result of:
- increased production sales at existing facilities in China;
- an increase in reported U.S. dollar sales due to the strengthening of
the Korean won and Chinese Renminbi, each against the U.S. dollar;
- the ramp-up of production at new facilities in China;
- increased production sales at a closures systems facility in Brazil;
- the acquisition of a mirrors facility in South Africa; and
- increased production sales at our powertrain facilities in Korea.
Complete Vehicle Assembly Sales
The terms of our various vehicle assembly contracts differ with respect to the ownership of components and supplies related to the assembly process and the method of determining the selling price to the OEM customer. Under certain contracts we are acting as principal, and purchased components and systems in assembled vehicles are included in our inventory and cost of sales. These costs are reflected on a full-cost basis in the selling price of the final assembled vehicle to the OEM customer. Other contracts provide that third party components and systems are held on consignment by us, and the selling price to the OEM customer reflects a value-added assembly fee only.
Production levels of the various vehicles assembled by us have an impact on the level of our sales and profitability. In addition, the relative proportion of programs accounted for on a full-cost basis and programs accounted for on a value-added basis also impacts our level of sales and operating margin percentage, but may not necessarily affect our overall level of profitability. Assuming no change in total vehicles assembled, a relative increase in the assembly of vehicles accounted for on a full-cost basis has the effect of increasing the level of total sales, however, because purchased components are included in cost of sales, profitability as a percentage of total sales is reduced. Conversely, a relative increase in the assembly of vehicles accounted for on a value-added basis has the effect of reducing the level of total sales and increasing profitability as a percentage of total sales.
For the three months
ended September 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales $ 1,017 $ 879 + 16%
-------------------------------------------------------------------------
Complete Vehicle Assembly Volumes (Units)
Full-Costed: 35,827 32,105 + 12%
BMW X3, Mercedes E-Class and G-Class,
and Saab 9(3) Convertible
Value-Added: 20,266 23,930 - 15%
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep Commander
-------------------------------------------------------------------------
56,093 56,035 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Complete vehicle assembly volumes remained relatively consistent with the prior year, increasing 58 units to 56,093 units for the third quarter of 2006 compared to 56,035 units for the third quarter of 2005. Complete vehicle assembly sales increased 16% or $138 million to $1.0 billion for the third quarter of 2006 compared to $879 million for the third quarter of 2005. The increase in complete vehicle assembly sales is primarily the result of:
- the increase in assembly volumes for the BMW X3;
- an increase in reported U.S. dollar sales as a result of the
strengthening of the euro against the U.S. dollar;
- the launch of the Jeep Commander in the first quarter of 2006; and
- higher assembly volumes for the Chrysler 300 which launched in the
second quarter of 2005.
These increases were partially offset by a decrease in assembly volumes for:
- the Jeep Grand Cherokee - the Chrysler Voyager - the Mercedes G-Class; and - the Saab 9(3) Convertible. Tooling, Engineering and Other
Tooling, engineering and other sales declined 18% or $88 million to $414 million for the third quarter of 2006 compared to $502 million for the third quarter of 2005.
In the third quarter of 2006, the major programs for which we recorded tooling, engineering and other sales were:
- GM's next generation full-size pickups and SUVs; - the Ford Escape and Mazda Tribute; - the MINI Cooper; - the Land Rover Range Rover; - the Saturn Outlook, Buick Enclave and GMC Acadia; - the Freightliner P-Class; and - the BMW X3.
In the third quarter of 2005, the major programs for which we recorded tooling, engineering and other sales were:
- the BMW X5; - GM's next generation full-size pickups and SUVs; - the Dodge Durango; - the Ford F-Series SuperDuty; and - the Cadillac STS;
In addition, tooling, engineering and other sales benefited from the strengthening of the Canadian dollar, euro and British pound, each against the U.S. dollar.
Gross Margin
Gross margin decreased $67 million to $635 million for the third quarter of 2006 compared to $702 million for the third quarter of 2005. Gross margin as a percentage of total sales decreased to 11.7% for the third quarter of 2006 compared to 13.0% for the third quarter of 2005. In the third quarter of 2006, the unusual items discussed in the "Highlights" section above negatively impacted gross margin and gross margin as a percentage of total sales by $3 million and 0.1%, respectively. Excluding these unusual items, the 1.2% decrease in gross margin as a percent of sales was primarily a result of:
- lower production sales in North America;
- operational inefficiencies and other costs at certain underperforming
facilities, particularly at certain of our interior systems
facilities;
- an increase in complete vehicle assembly sales for the BMW X3, which
has a lower gross margin than our consolidated average gross margin
because the costs of this vehicle assembly program are reflected on a
full-cost basis in the selling price of the vehicle; and
- incremental customer price concessions.
These factors were partially offset by:
- a favourable revaluation to warranty accruals, substantially in
Europe;
- productivity and efficiency improvements at certain divisions;
- lower employee profit sharing as a result of the decrease in our
consolidated earnings; and
- price reductions from our suppliers.
Depreciation and Amortization
Depreciation and amortization costs increased 10% or $17 million to $191 million for the third quarter of 2006 compared to $174 million for the third quarter of 2005. The increase in depreciation and amortization was primarily as a result of:
- an increase in reported U.S. dollar depreciation and amortization due
to the strengthening of the Canadian dollar and euro, each against the
U.S. dollar.
- depreciation and amortization of assets at new facilities that
launched during or subsequent to the third quarter of 2005;
- an increase in assets employed in the business to support future
growth; and
- depreciation and amortization of assets related to the acquisition of
CTS.
Selling, General and Administrative ("SG&A")
SG&A expenses as a percentage of sales increased to 5.5% for the third quarter of 2006 compared to 5.3% for the third quarter of 2005. SG&A expenses increased 4% or $12 million to $299 million for the third quarter of 2006 compared to $287 million for the third quarter of 2005. Excluding the unusual items discussed in the "Highlights" section above, SG&A expenses decreased by $2 million primarily as a result of:
- a net increase in foreign exchange gains;
- lower spending on new facilities in the third quarter of 2006 compared
to the third quarter of 2005; and
- lower incentive compensation.
These factors were partially offset by:
- an increase in reported U.S. dollar SG&A due to the strengthening of
the Canadian dollar and euro, each against the U.S. dollar; and
- increased selling, general and administrative expenses related to CTS.
Earnings before Interest and Taxes ("EBIT")(1)
For the three months
ended September 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
North America $ 67 $ 159 - 58%
Europe 68 38 + 79%
Rest of World (4) 2 n/a
Corporate and Other 18 43 - 58%
-------------------------------------------------------------------------
Total EBIT $ 149 $ 242 - 38%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in EBIT for the third quarters of 2006 and 2005 were the following unusual items, which have been discussed in the "Highlights" section above.
For the three months
ended September 30,
----------------------
2006 2005
-------------------------------------------------------------------------
North America
Restructuring charges $ (2) $ (5)
Impairment charges (2) -
-------------------------------------------------------------------------
(4) (5)
-------------------------------------------------------------------------
Europe
Restructuring charges (1) (9)
-------------------------------------------------------------------------
(1) (9)
-------------------------------------------------------------------------
Corporate and Other
Settlement gain - 26
-------------------------------------------------------------------------
- 26
-------------------------------------------------------------------------
$ (5) $ 12
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBIT is defined as operating income as presented on our unaudited
consolidated financial statements before net interest (income)
expense.
North America
EBIT in North America decreased 58% or $92 million to $67 million for the third quarter of 2006 compared to $159 million for the third quarter of 2005. Excluding the North American unusual items discussed in the "Highlights" section above, EBIT decreased by $93 million in North America, primarily as a result of:
- lower margins earned as a result of a decrease in production sales;
- operational inefficiencies and other costs at certain underperforming
divisions, particularly at certain of our interior systems facilities;
- incremental customer price concessions; and
- costs incurred to develop and grow our electronics capabilities.
These factors were partially offset by:
- margins earned on new programs that launched during or subsequent to
the third quarter of 2005;
- margins earned on increased production and/or content on certain
programs;
- operational improvements at certain underperforming divisions;
- lower affiliation fees paid to Corporate; and
- lower employee profit sharing as a result of the decrease in our
consolidated earnings.
Europe
EBIT in Europe increased 79% or $30 million to $68 million for the third quarter of 2006 compared to $38 million for the third quarter of 2005. The increase in EBIT is substantially the result of a favourable revaluation to warranty accruals as a result of updated warranty claim data received in the third quarter of 2006. EBIT was also favourably affected by:
- the European unusual items discussed in the "Highlights" section
above;
- operational improvements at certain underperforming divisions;
- increased margins earned on higher volumes for certain production and
complete vehicle assembly programs;
- lower affiliation fees paid to Corporate; and
- lower employee profit sharing as a result of the decrease in our
consolidated earnings.
These factors were partially offset by:
- lower margins as a result of a decrease in vehicle production volumes
on certain programs;
- operational inefficiencies and other costs at certain facilities,
particularly at certain of our interior systems facilities;
- costs incurred to develop and grow our electronics capabilities; and
- incremental customer price concessions.
Rest of World
EBIT in the Rest of World decreased $6 million to a loss of $4 million for the third quarter of 2006 compared to income of $2 million for the third quarter of 2005.
The decrease in EBIT was primarily as a result of:
- costs incurred at new facilities, primarily in China, as we continue
to pursue opportunities in this growing market; and
- lower profits earned at our closures systems facility in Brazil.
Partially offsetting these costs was the additional margin earned on the increased production sales discussed above.
Corporate and Other
Corporate and Other EBIT decreased 58% or $25 million to $18 million for the third quarter of 2006 compared to $43 million for the third quarter of 2005. Excluding the Corporate and Other unusual items discussed in the "Highlights" section above, EBIT increased $1 million, primarily as a result of:
- a decrease in incentive compensation as a result of the decrease in
our consolidated earnings; and
- an increase in equity income earned on investments.
These factors were partially offset by a decrease in affiliation fees earned from our divisions.
Interest (Income) Expense, Net
During the third quarter of 2006, we earned net interest income of $6 million, compared to net interest expense of $2 million for the third quarter of 2005. The $8 million positive variance is primarily as a result of:
- a reduction in interest expense due to:
- the repayment in January 2006 of the second series of our senior
unsecured notes related to the acquisition of New Venture Gear
("NVG"); and
- the repayment of $59 million of senior unsecured notes in May 2006;
and
- an increase in interest income earned.
Operating Income
Operating income decreased 35% or $85 million to $155 million for the third quarter of 2006 compared to $240 million for the third quarter of 2005. Excluding unusual items discussed in the "Highlights" section above, operating income decreased 30% or $68 million for the third quarter of 2006. The decrease in operating income (excluding unusual items) was the result of the decrease in EBIT (excluding unusual items) combined with the positive variance in net interest (income) expense, both as described above.
Income Taxes
Our effective income tax rate on operating income (excluding equity income) increased to 40.4% for the third quarter of 2006 from 33.9% for the third quarter of 2005. In the third quarters of 2006 and 2005, income tax rates were impacted by the unusual items discussed in the "Highlights" section above. Excluding the unusual items, our effective income tax rate increased to 39.7% for the third quarter of 2006 compared to 32.6% for the third quarter of 2005. The increase in the effective income tax rate is primarily the result of an unfavourable Supreme Court of Canada ruling against a Canadian taxpayer which restricts deductibility of certain foreign exchange losses. As a result, we recorded a $23 million tax expense substantially related to the write-off of a tax asset.
The impact of this ruling was partially offset by:
- a change in mix of earnings, whereby proportionately more income was
earned in jurisdictions with lower income tax rates, and;
- a decrease in losses not benefited as a result of income tax planning
strategies.
Net Income
Net income decreased by 41% or $65 million to $94 million for the third quarter of 2006 compared to $159 million for the third quarter of 2005. Excluding the $9 million related to unusual items discussed in the "Highlights" section above, net income decreased $56 million as a result of the decrease in operating income, and the decrease in income taxes, all as discussed above.
Earnings per Share
For the three months
ended September 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting
or Class B Share
Basic $ 0.87 $ 1.47 - 41%
Diluted $ 0.86 $ 1.44 - 40%
-------------------------------------------------------------------------
Average number of Class A Subordinate
Voting and Class B Shares outstanding
(millions)
Basic 108.6 108.4 -
Diluted 111.4 111.2 -
-------------------------------------------------------------------------
Diluted earnings per share decreased 40% or $0.58 to $0.86 for the third quarter of 2006 compared to $1.44 for the third quarter of 2005. Included in the $0.58 decrease in diluted earnings per share is the net decrease in diluted earnings per share of $0.08 related to the unusual items discussed in the "Highlights" section above.
Excluding the unusual items, diluted earnings per share decreased $0.50 from the third quarter of 2005 to the third quarter of 2006 as a result of the decrease in net income (excluding unusual items) described above.
Return on Funds Employed ("ROFE")(1)
An important financial ratio that we use across all of our operations to measure return on investment is ROFE.
ROFE for the third quarter of 2006 was 9.0%, a decrease from 14.9% for the third quarter of 2005. The unusual items discussed in the "Highlights" section above negatively impacted ROFE in the third quarter of 2006 by 0.2% and positively impacted ROFE by 0.7% in the third quarter of 2005.
Excluding these unusual items, the 5.0% decrease in ROFE can be attributed to a decrease in EBIT (excluding unusual items) as discussed above combined with an increase in our average funds employed for the third quarter of 2006 compared to the third quarter of 2005. The increase in our average funds employed was primarily as a result of:
- acquisitions completed during or subsequent to the third quarter of
2005, including CTS in February; and
- increased funds employed for new facilities associated with recent or
upcoming launches.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
-------------------------------------------------------------------------
Cash Flow from Operations
For the three months
ended September 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
Net income $ 94 $ 159
Items not involving current cash flows 179 202
-------------------------------------------------------------------------
273 361 $ (88)
Changes in non-cash operating assets
and liabilities 49 (482)
-------------------------------------------------------------------------
Cash provided from operating activities $ 322 $ (121) $ 443
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flow from operations before changes in non-cash operating assets and liabilities decreased $88 million to $273 million for the third quarter of 2006 compared to $361 million for the third quarter of 2005. The decrease in cash flow from operations was due to a $65 million decrease in net income (as discussed above) combined with a $23 million decrease in items not involving current cash flows.
The decrease in items not involving current cash flows was primarily a result of:
- a $55 million decrease in future taxes as a result of losses benefited
during the third quarter of 2006 compared to the utilization of losses
that were previously benefited in the third quarter of 2005; and
- a $3 million increase in equity income.
These decreases were partially offset by:
- a $17 million increase in depreciation and amortization; and
- an $18 million increase in other non-cash charges.
-------------------------------------------------------------------------
(1) ROFE is defined as EBIT divided by the average funds employed for the
period. Funds employed is defined as long-term assets, excluding future
tax assets, plus non-cash operating assets and liabilities. Non-cash
operating assets and liabilities are defined as the sum of accounts
receivable, inventory, income taxes recoverable and prepaid assets less
the sum of accounts payable, accrued salaries and wages, other accrued
liabilities, income taxes payable and deferred revenues.
Cash generated by non-cash operating assets and liabilities amounted to $49 million for the third quarter of 2006 compared to cash invested in non-cash operating assets and liabilities for the third quarter of 2005. The change in non-cash operating assets and liabilities is comprised of the following sources (and uses) of cash:
For the three months
ended September 30,
----------------------
2006 2005
-------------------------------------------------------------------------
Accounts receivable $ 236 $ (505)
Inventory (28) (116)
Prepaid expenses and other 2 (11)
Accounts payable and other accrued liabilities (155) 140
Income taxes payable 5 8
Deferred revenues (11) 2
-------------------------------------------------------------------------
Changes in non-cash operating assets and
liabilities $ 49 $ (482)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The cash generated from accounts receivable during the third quarter of 2006 is primarily a result of the decrease in production sales in North America during the third quarter of 2006 compared to the second quarter of 2006 and the collection of tooling receivables in North America during the third quarter of 2006. In Europe, no net cash was generated from accounts receivable as the cash generated from the collection of tooling and engineering receivables was offset by an increase in complete vehicle assembly receivables.
The decrease in accounts payable during the third quarter of 2006 is associated with the decrease in production sales in North America, as discussed above, and the payment of tooling related accounts payable. In Europe, the increase in accounts payable associated with the increase in complete vehicle assembly sales was offset by a decrease in warranty accruals as discussed above.
The increase in accounts receivable during the third quarter of 2005 is primarily due to the timing of cash receipts whereby approximately $500 million of cash was received shortly after the end of the third quarter ended September 30, 2005.
The increase in inventory during the third quarter of 2005 is a result of increased tooling inventory on certain programs that launched subsequent to the third quarter of 2005, an increase in work-in-process at one of our assembly facilities as a result of temporary supply disruptions and an increase in raw material inventory to support future production.
The increase in accounts payable and other accrued liabilities during the third quarter of 2005 is consistent with the inventory build described above.
Capital and Investment Spending
For the three months
ended September 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
Fixed assets $ (198) $ (198)
Investments and other assets (6) (31)
-------------------------------------------------------------------------
Fixed assets, investments and other
assets additions (204) (229)
Purchases of subsidiaries (51) 1
Proceeds from disposals 8 7
-------------------------------------------------------------------------
Cash used in investing activities $ (247) $ (221) $ (26)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, investments and other assets additions
In the third quarter of 2006, we invested $198 million in fixed assets. While investments were made to refurbish or replace assets consumed in the normal course of business and for productivity improvements, a large portion of the investment in the third quarter of 2006 was for manufacturing equipment for programs that launched during the third quarter of 2006 or will be launching subsequent to the third quarter of 2006, including equipment for GM's next generation full-size pickups.
Purchase of subsidiaries
The purchases of subsidiaries for the third quarter of 2006 includes $46 million to acquire the net assets of the Magna Golf Course located in Aurora, Ontario from MEC. The transaction was reviewed by a Special Committee of, and approved by the independent members of, Magna's Board of Directors following the unanimous recommendation of the Special Committee.
Proceeds from disposition
Proceeds from disposition for the third quarter of 2006 represents normal course fixed and other asset disposals.
Financing
For the three months
ended September 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
Repayments of debt $ (10) $ (16)
Issues of debt 108 56
Issues of Class A Subordinate Voting
Shares 1 6
Cash dividends paid (41) (41)
-------------------------------------------------------------------------
Cash used in financing activities $ 58 $ 5 $ 53
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The issues of debt during the third quarter of 2006 relates primarily to an increase in bank indebtedness in certain jurisdictions to support capital spending requirements.
Financing Resources
As at As at
September December
30, 2006 31, 2005 Change
-------------------------------------------------------------------------
Liabilities
Bank indebtedness $ 233 $ 89
Long-term debt due within one year 101 131
Long-term debt 652 700
-------------------------------------------------------------------------
986 920
Shareholders' equity 7,176 6,565
-------------------------------------------------------------------------
Total capitalization $ 8,162 $ 7,485 $ 677
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total capitalization increased by 9% or $677 million to $8.2 billion at September 30, 2006 as compared to $7.5 billion at December 31, 2005. The increase in capitalization is a result of an increase in shareholders' equity and liabilities of $611 million and $66 million, respectively.
The increase in shareholders' equity is primarily the result of:
- net income earned during the first nine months of 2006 (as discussed
above);
- a $216 million increase in the currency translation adjustment,
primarily as a result of the strengthening of the Canadian dollar
against the U.S. dollar between December 31, 2005 and September 30,
2006; and
- Class A Subordinate Voting Shares issued on the exercise of stock
options.
The increases in equity were partially offset by:
- dividends paid during the first nine months of 2006; and
- a $6 million reduction of share capital related to the repurchase of
our Class A Subordinate Voting Shares which had been awarded on a
restricted basis to an executive.
The increase in liabilities is primarily a result of an increase in bank indebtedness as a result of:
- the acquisition of CTS in February;
- to support capital spending requirements; and
- an increase in reported U.S. dollar amounts as a result of the
strengthening of the Canadian dollar against the U.S. dollar.
These increases were partially offset by decreases in long-term debt as a result of:
- the repayment of the second series of our senior unsecured notes
related to the acquisition of NVG in January 2006;
- the repayment of $59 million of senior unsecured notes in May 2006;
and
- the deconsolidation of a partially owned European subsidiary which
declared bankruptcy on August 16, 2006 and has subsequently been sold
by the administrator.
During the first nine months of 2006, our cash resources decreased by $33 million to $1.6 billion as a result of the cash used in investing and financing activities, partially offset by the cash provided from operating activities as discussed above. In addition to our cash resources, we had term and operating lines of credit totalling $2.0 billion, of which $1.6 billion was unused and available.
Maximum Number of Shares Issuable
The following table presents the maximum number of shares that would be outstanding if all of the outstanding stock options and Subordinated Debentures issued and outstanding at November 3, 2006 were exercised or converted:
Class A Subordinate Voting and Class B Shares 109,729,081
Subordinated Debentures(i) 1,096,589
Stock options(ii) 4,237,182
-------------------------------------------------------------------------
115,062,852
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) The above amounts include shares issuable if the holders of the
6.5% Convertible Subordinated Debentures exercise their conversion
option but exclude Class A Subordinate Voting Shares issuable, only
at our option, to settle interest and principal related to the 6.5%
Convertible Subordinated Debentures. The number of Class A
Subordinate Voting Shares issuable at our option is dependent on
the trading price of Class A Subordinate Voting Shares at the time
we elect to settle the 6.5% Convertible Subordinated Debenture
interest and principal with shares.
The above amounts also exclude Class A Subordinate Voting Shares
issuable, only at our option, to settle the 7.08% Subordinated
Debentures on redemption or maturity. The number of shares issuable
is dependent on the trading price of Class A Subordinate Voting
Shares at redemption or maturity of the 7.08% Subordinated
Debentures.
(ii) Options to purchase Class A Subordinate Voting Shares are
exercisable by the holder in accordance with the vesting provisions
and upon payment of the exercise price as may be determined from
time to time pursuant to our stock option plans.
Contractual Obligations and Off-Balance Sheet Financing
There have been no material changes with respect to the contractual obligations requiring annual payments during the third quarter of 2006 that are outside the ordinary course of business. Refer to our MD&A included in our 2005 Annual Report.
Long-term receivables in other assets are reflected net of outstanding borrowings from a customer's finance subsidiary of $50 million since we have a legal right of set-off of the customer's long-term receivable payable to us against such borrowings and intend to settle the related amounts simultaneously.
RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
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Sales
For the nine months
ended September 30,
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2006 2005 Change
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Vehicle Production Volumes (millions of
units)
North America 11.727 11.812 - 1%
Europe 11.566 11.894 - 3%
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Average Dollar Content Per Vehicle
North America $ 767 $ 721 + 6%
Europe $ 357 $ 321 + 11%
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Sales
External Production
North America $ 8,996 $ 8,519 + 6%
Europe 4,125 3,816 + 8%
Rest of World 190 123 + 54%
Complete Vehicle Assembly 3,132 3,059 + 2%
Tooling, Engineering and Other 1,369 1,440 - 5%
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Total Sales $ 17,812 $ 16,957 + 5%
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External Production Sales - North America
External production sales in North America increased 6% or $477 million to $9.0 billion for the nine months ended September 30, 2006 compared to $8.5 billion for the nine months ended September 30, 2005. This increase in production sales reflects a 6% increase in our North American average dollar content per vehicle partially offset by a 1% decrease in North American vehicle production volumes.
Our average dollar content per vehicle grew by 6% or $46 to $767 for the nine months ended September 30, 2006 compared to $721 for the nine months ended September 30, 2005, primarily as a result of:
- the launch of new programs during or subsequent to the nine months
ended September 30, 2005, including:
- GM's new full-size SUVs;
- the Ford Fusion, Mercury Milan and Lincoln Zephyr;
- the Chevrolet HHR;
- the Chevrolet Impala;
- the Dodge Charger; and
- the Pontiac Torrent;
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar;
- increased production and/or content on certain programs, including the
Mercedes M-Class; and
- the acquisition of CTS in February 2006.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Ford Escape and Mazda Tribute;
- the Dodge Caravan, Grand Caravan and Chrysler Town & Country;
- the Chrysler Pacifica;
- the Cadillac STS;
- the Jeep Grand Cherokee;
- the Chevrolet Equinox; and
- the Ford Freestar and Mercury Monterey;
- programs that ended production during or subsequent to the nine months
ended September 30, 2005;
- the sale of certain facilities during or subsequent to the third
quarter of 2005; and
- incremental customer price concessions.
External Production Sales - Europe
External production sales in Europe increased 8% or $309 million to $4.1 billion for the nine months ended September 30, 2006 compared to $3.8 billion for the nine months ended September 30, 2005. This increase in production sales reflects an 11% increase in our European average dollar content per vehicle partially offset by a 3% decline in European vehicle production volumes.
Our average dollar content per vehicle grew by 11% or $36 to $357 for the nine months ended September 30, 2006 compared to $321 for the nine months ended September 30, 2005, primarily as a result of:
- acquisitions completed during or subsequent to the first nine months
of 2006, including CTS in February 2006;
- the launch of new programs during or subsequent to the first nine
months of 2005, including:
- the Honda Civic;
- the Volkswagen Passat;
- the Peugeot 207;
- the Mercedes S-Class; and
- the Chrysler 300; and
- increased production and/or content on certain programs, including:
- the Mercedes B-Class; and
- the BMW X3.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including the Mercedes A-Class and C-Class;
- a decrease in reported U.S. dollar sales primarily due to the
weakening of the euro and British pound against the U.S. dollar;
- programs that ended production during or subsequent to the nine months
ended September 30, 2005, including production on all MG Rover
programs as a result of the MG Rover situation;
- the sale of certain facilities during or subsequent to the first nine
months of 2005; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in the Rest of World increased 54% or $67 million to $190 million for the nine months ended September 30, 2006 compared to $123 million for the nine months ended September 30, 2005. The increase in production sales is primarily a result of:
- the ramp-up of production at new facilities in China;
- increased production sales at our powertrain facilities in Korea;
- an increase in production sales at a closures systems facility in
Brazil;
- the acquisition of a mirrors facility in South Africa; and
- an increase in reported U.S. dollar sales due to the strengthening of
the Korean Won and Chinese Renminbi, each against the U.S. dollar.
Complete Vehicle Assembly Sales
For the nine months
ended September 30,
--------------------
2006 2005 Change
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Complete Vehicle Assembly Sales $ 3,132 $ 3,059 + 2%
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Complete Vehicle Assembly Volumes
(Units)
Full-Costed: 114,776 111,417 + 3%
BMW X3, Mercedes E-Class and
G-Class, and Saab 9(3) Convertible
Value-Added: 68,177 53,904 + 26%
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep Commander
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182,953 165,321 + 11%
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Complete vehicle assembly volumes increased 11% or 17,632 units to 182,953 units for the nine months ended September 30, 2006 compared to 165,321 units for the nine months ended September 30, 2005. Complete vehicle assembly sales increased 2% or $73 million to $3.132 billion for the nine months ended September 30, 2006 compared to $3.059 billion for the nine months ended September 30, 2005. The increase in complete vehicle assembly sales is primarily the result of an increase in full-costed vehicle assembly volumes combined with the launch of new programs during or subsequent to the nine months ended September 30, 2005 including the Chrysler 300 in the second quarter of 2005 and the Jeep Commander in the first quarter of 2006.
Tooling, Engineering and Other
Tooling, engineering and other sales decreased 5% or $71 million to $1.369 billion for the nine months ended September 30, 2006 compared to $1.440 billion for the nine months ended September 30, 2005.
In the nine months ended September 30, 2006, the major programs for which we recorded tooling, engineering and other sales were:
- GM's next generation full-size pickups and SUVs; - the MINI Cooper; - the Freightliner P-Class; - the Ford Escape; - the Ford Edge; - the Ford F-Series SuperDuty; - the Suzuki XL7; - The Ford 500; and - the BMW Z4.
In the nine months ended September 30, 2005, the major programs for which we recorded tooling, engineering and other sales were:
- the BMW X5; - GM's next generation full-size pickups and SUVs; - the Ford Fusion, Mercury Milan and Lincoln Zephyr; - the Dodge Caliber; - the Hummer H3; - the BMW X3; - the Mercedes M-Class; - the Dodge Durango; and - the Ford F-Series SuperDuty.
In addition, tooling, engineering and other sales benefited from the strengthening of the Canadian dollar against the U.S. dollar.
EBIT
For the nine months
ended September 30,
--------------------
2006 2005 Change
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North America $ 535 $ 540
Europe 161 175
Rest of World (4) 5
Corporate and Other 50 102
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Total EBIT $ 742 $ 822 - 10%
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Included in EBIT for the nine-month periods ended September 30, 2006 and 2005 were the following unusual items, which have been discussed in the "Highlights" section above.
For the nine months
ended September 30,
---------------------
2006 2005
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North America
Restructuring charges $ (27) $ (9)
Sale of facilities (5) 16
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(32) 7
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Europe
Restructuring charges (13) (16)
Sale of facility (12) -
Charges associated with MG Rover - (15)
Impairment charges - (5)
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(25) (36)
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Corporate and Other
Restructuring charges - (3)
Settlement gain - 26
Foreign currency gain - 18
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- 41
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FIRST AND FINAL ADD TO FOLLOW